Familiar warning signs in for-profit schools

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I took office in 2007, just as the real estate boom was turning into the subprime meltdown. In the last six years, we’ve learned a lot about the root causes of that financial collapse — from unscrupulous salespeople to Wall Street’s investment in risky loans to ineffective regulations and regulators.

Unfortunately, we have already begun to see this similar behavior in another growing industry — for-profit colleges and trade schools. And since the vast majority of funds used to pay tuition comes from federal taxpayers, we all have a stake in fixing it before it is too late.

Dramatic expansion driven by aggressive marketing. In the subprime mortgage industry, we saw the predatory and deceptive marketing of loan products that were destined to fail. When a majority of those loans inevitably went into default, the lending crisis went into overdrive.

For-profit schools are now using similar tactics to market to populations with increased access to federal funds such as our veterans and low-income families. They often exaggerate the quality and scope of the training at the school, and the job placement rates after graduation. In one recent case, a school was advertising a job placement rate for medical training graduates of 70 percent, but it was actually closer to 25 percent. That is in part because the school was counting jobs in fast food restaurants and big box stores toward their “success” rates.

Wall Street involvement. For-profit schools are expensive, with many certificate programs costing four to five times more than at public schools. They are frequently owned by Wall Street investors and have developed into a multibillion-dollar industry. With that has come an overwhelming focus on profit, not instruction. In 2009, 41 percent of for-profit revenue went to marketing and profit, and just 17 percent went to the actual instruction of students. That should give you a clear sense of their priorities.

Thousands of unsustainable loans. High tuition costs, combined with aggressive and deceptive recruitment, has created a flood of unsustainable student loans. Students at for-profit schools account for 47 percent of all student loan fund defaults, and an alarming quarter of students defaulted within three years. For comparison sake, the default rate at the worst subprime lenders at the height of the mortgage crisis was much lower. This is a growing and unsustainable crisis.

The government stands to lose from private market misconduct. The final unfortunate comparison between for-profit schools and subprime lending is that taxpayers are left to pay the price. Fifteen of the largest for-profit schools received 86 percent of their revenues from federal student aid programs like the GI Bill and Pell grants. In 2009, federal taxpayers paid for more than $32 billion in student loans and grants to for-profit institutions. The schools make their money no matter what. But because of the heavy taxpayer funding of these loans, it is the students and taxpayers who are on the hook when these loans inevitably default.

So what do we do about this?

My office is bringing enforcement actions to seek accountability for predatory tactics by for-profits. We also must make common-sense reforms at the state and federal level to better protect students and taxpayers. The federal government should restrict for-profit schools from using federal funds toward marketing. On the state side, we should similarly restrict these funds and establish clear teaching/instruction ratios that schools must adhere to. We should also require the schools to disclose accurate job placement statistics and clearly advertise their for-profit status. State agencies should be updating regulations to further protect against unfair and deceptive marketing tactics. Our office will do the same.

Finally, we urge prospective students to do their homework before entering one of these schools. Make sure what you are signing up for is what you expect and is a better value than our community colleges and other nonprofit institutions.

Just as when the first clusters of foreclosures appeared in 2007, the warning signs on for-profit schools are beginning to surface. We reacted too slowly to the subprime meltdown. If we learned anything from the past, we must act now to prevent another crisis for our students and for taxpayers.

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